The Bank of England (BoE) has signalled it is ready to cut interest rates further if the UK jobs market shows clearer signs of slowing down, according to comments from governor Andrew Bailey.
Speaking to The Times, Bailey shared a cautiously optimistic view, stating that “the path is downward” for interest rates, which are currently set at 4.25 per cent.
The next BoE meeting is scheduled for 7 August, with many economists expecting a rate cut. Yet the central bank remains committed to a “gradual and careful” approach as inflation still sits above its target.
Bailey highlighted that the UK economy is growing below its potential, which creates “slack” – spare capacity that could help ease inflationary pressures.
“If we saw the slack opening up much more quickly, that would lead us to a different conclusion,” Bailey explained. He added: “I really do believe the path is downward but we continue to use the words ‘gradual and careful’ because … some people say, ‘Why are you cutting when inflation’s above target?’”
In economic terms, “slack” refers to unused resources, like factories operating below capacity or individuals unable to find work.
Bailey’s comments arrive amid rising market speculation, with investors now pricing in an 85 per cent chance of a rate cut, up from 76 per cent just a week earlier.
Markets are anticipating a cut of 0.25 percentage points, potentially lowering the key rate to 4 per cent. Analysts remain focused on upcoming economic data, especially inflation and employment figures.
Victoria Scholar, head of investment at Interactive Investor, noted that disappointing GDP figures, alongside weakening jobs data, have strengthened the argument for a rate cut in August.
She commented: “Friday’s disappointing GDP figures, combined with these weak jobs figures boost the case for the Bank of England to cut interest rates in August.”
“All eyes are on Wednesday’s inflation report, with CPI expected to stay at around 3.4 per cent in June, roughly unchanged for the third consecutive month,” Scholar added.
Enrique Diaz-Alvarez, chief economist at Ebury, said that upcoming employment figures could provide vital insights into the health of the UK economy.
He explained: “Thursday’s publication of the May/June employment data is critical, perhaps even more so than Wednesday’s inflation report. By Thursday afternoon this week we, and the Bank of England, should have a clearer view of the extent of weakness in UK economic data.”
Diaz-Alvarez added that last week’s disappointing monthly GDP figures for May almost guarantee that Britain’s economy contracted over the second quarter. This increases the likelihood of a rate cut in August and could also raise the risk of tax hikes later in the year.
Treasury minister Darren Jones hinted that the freeze on income tax thresholds could be extended beyond 2028 to balance the public finances. Although Jones said there were no immediate plans, he kept the option open for the future.
In an interview on ITV’s Good Morning Britain, Jones emphasised the government’s commitment not to raise the headline rate of income tax, national insurance, or VAT, arguing that such rises would unfairly affect people on lower incomes.
Bailey also observed that some businesses are adjusting employment practices and slowing wage growth due to higher national insurance contributions, which increased from 13.8 per cent to 15 per cent in April 2023. This change is expected to raise around £25bn annually.
Official data recently showed that job vacancies fell to 736,000 in the three months to May – the lowest since 2021, when the pandemic disrupted hiring. Combined with weaker economic growth, this suggests the UK jobs market may indeed be cooling.
Despite these signs, Jones downplayed wider economic concerns, highlighting that the UK had the fastest-growing economy in the G7 during the first quarter of the year.
He concluded by acknowledging the Bank’s independence, stating: “Of course, we had that particular tax decision in the budget last year, because our commitment was to protect working people in their pay slips.”
Download NOW
4 Simple Steps To Becoming Wealthy Through Property